Moody’s assigns Caa1 corporate family rating to Dex Media
2013-06-10 18:12:07.610 GMT
New York, June 10, 2013 — Moody’s Investors Service (“Moody’s”)
assigned a Caa1 corporate family rating and a Caa1-PD probability of
default rating for Dex Media, Inc. (“Dex Media” or “the company”). The
ratings agency also assigned a Caa3 (LGD6-95%) rating to Dex Media’s
senior subordinated notes due 2017, a Caa1 (LGD3-45%) rating to the term
loans of R.H. Donnelley Inc. (“RHDI”), Dex Media West Inc. (“DMW”), Dex
Media East Inc. (“DME”), SuperMedia Inc. (“SuperMedia”) and a SGL-2
speculative grade liquidity rating. The rating outlook is negative.
Moody’s has taken the following rating actions:
Issuer: Dex Media, Inc.
Corporate Family Rating — Assigned Caa1
Probability of Default Rating — Assigned Caa1-PD
Outlook — Negative
Speculative Grade Liquidity Rating — Assigned SGL-2
Senior Subordinated Notes due 1/29/17 — Assigned Caa3, LGD6-95%
Issuer: R.H. Donnelley, Inc.
Outlook — Negative
Senior Secured Term Loan due 12/31/16 — Assigned Caa1, LGD3-45%
Issuer: Dex Media West, Inc.
Outlook — Negative
Senior Secured Term Loan due 12/31/16– Assigned Caa1, LGD3-45%
Issuer: Dex Media East, Inc.
Outlook — Negative
Senior Secured Term Loan due 12/31/16 — Assigned Caa1, LGD3-45%
Issuer: SuperMedia Inc.
Outlook — Negative
Senior Secured Term Loan due 12/31/16 — Assigned Caa1, LGD3-45%
RATINGS RATIONALE
Dex Media’s Caa1 corporate family rating (“CFR”) is supported by its
position as the second largest print and digital yellow pages business
in the U.S., modest EBITDA margins, low capital intensity, and the
company’s ability to generate relatively predictable, albeit declining,
levels of free cash flows. These strengths are offset by the company’s
highly leveraged capital structure, a fairly rapid structural decline in
the print directory segment, difficulties growing the digital business,
expanding competitive challenges and very low barriers to entry in
digital advertising. Finally, a prior history of the company
opportunistically repurchasing debt at a discount (which Moody’s
considered distressed exchanges) weighs on the rating. Moody’s believes
that purchases at a discount are likely in the future since the company
amended its bank covenants to make it possible to repurchase additional
bank debt on the open market through the end of 2016.
Dex Media is attempting to reinvent its business by reducing its
reliance on print advertising through the development of digital and
mobile directory service applications. However, we have doubts that the
company will be able to transition its business away from a reliance on
print directories quickly enough to stabilize its revenues and earnings.
It also remains to be seen whether the business model is viable. We
project double-digit declines in net revenues and declines in EBITDA of
about 10% in both 2013 and 2014. We also expect that the relatively
robust levels of free cash flow that the company is currently generating
will decline at an accelerating pace over time. Dex Media will continue
its focus on reducing costs to maximize operating efficiency. Offsetting
some of the revenue decline and margin pressure is the company’s
expected annual run-rate expense synergies of about $150-175 million,
which are expected to be fully realized in 2015, and $200-275 million of
cash flow due to the preservation of Dex One tax attributes.
The senior secured term loans at RHDI, DMW, DME, and SuperMedia are all
rated Caa1 (LGD3-45%) reflecting their structural seniority to Dex
Media’s $220 million of senior subordinated notes. The subordinated
notes are rated Caa3 (LGD6-95%) and would likely experience meaningful
loss in the event of another default. The company is restricted from
making open market repurchases of its subordinated notes during the
credit agreement period and is required to PIK half of the interest on
these securities. Each of the credit facilities are separate facilities
with no cross guarantees or collateralization provision among the
entities, subject to certain exceptions. The Shared Guarantee and
Collateral agreement has certain cross guarantee and collaterization
provisions among Dex entities, but excluding SuperMedia and its
subsidiaries. However, an event of default by one of the entities could
trigger a call on the applicable guarantor. An event of default by a
guarantor on a guarantee obligation could be an event of default under
the applicable credit agreement, and if demand is made under the
guarantee and the creditor accelerates the indebtedness, failure to
satisfy such claims in full would in turn trigger a default under all of
the other credit facilities. A subordinated guarantee also provides that
SuperMedia and each significant Dex entity guarantees the obligations of
the other such entities, including SuperMedia, provided that no claim
may be made on such guarantee until the senior secured debt of such
entity is satisfied and discharged.
The SGL-2 speculative grade liquidity rating reflects Dex Media’s
ability to service its required debt amortizations and excess cash flow
sweep payments at each of its subsidiaries and approximately $340
million of projected free cash flow in 2013. Free cash flow generation
is critical to liquidity and the Caa1 CFR due to the absence of a
revolver. Moody’s anticipates DMW, DME and RHDI will have at least a 15%
EBITDA cushion within the financial maintenance covenants over the next
12-18 months.
The negative rating outlook reflects Moody’s expectation that Dex Media
will opportunistically repurchase debt at a discount in the future.
The ratings are unlikely to be upgraded due to the secular decline of
the print business and low barriers to entry in the digital segment.
The ratings could be lowered if the print business erodes faster than
expected (about 20% per year) and the digital business fails to grow,
leading to a more-than-expected rapid decline in free cash flow and less
debt reduction, or if leverage (Moody’s adjusted) remains above 3.8x.
The principal methodology used in this rating was Global Publishing
Industry published in December 2011. Other methodologies used include
Loss Given Default for Speculative-Grade Non-Financial Companies in the
U.S., Canada and EMEA published in June 2009. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this
announcement provides certain regulatory disclosures in relation to each
rating of a subsequently issued bond or note of the same series or
category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody’s
rating practices. For ratings issued on a support provider, this
announcement provides certain regulatory disclosures in relation to the
rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider’s credit rating. For provisional ratings, this
announcement provides certain regulatory disclosures in relation to the
provisional rating assigned, and in relation to a definitive rating that
may be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior to
the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings tab
on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and whose
ratings may change as a result of this rating action, the associated
regulatory disclosures will be those of the guarantor entity. Exceptions
to this approach exist for the following disclosures, if applicable to
jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure
from rated entity.
Regulatory disclosures contained in this press release apply to the
credit rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to the lead rating
analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
NOTES FROM MESSAGE BOARDS
First, that is an upgrade from last year …
Second, they also gave DXM an SGL-2 rating…
SGL-2 Issuers rated SGL-2 possess good liquidity. They are likely to meet their obligations over
the coming 12 months through internal resources but may rely on external sources of
committed financing. The issuer’s ability to access committed sources of financing is highly likely based on Moody’s evaluation of near-term covenant compliance.
so those ratings are actually good news for DXM…
they also said…
“The negative rating outlook reflects Moody’s expectation that Dex Media will opportunistically repurchase debt at a discount in the future.”
these ratings were ALREADY priced in last June when the Dex and SPMD ratings were lowered at that time…
third, the caa1 rating is just below the b ratings and above the higher risk ratings of caa2 and caa3…upgraded ratings mean an improving outlook…do not think for minute that Kyle Bass and Hayman Capital and John Paulson of Paulson and Co. didn’t look at the future business model and then BUY 10% and 11% respectively w/o deep DD…this is headed to $100 in 4 years or less…more mergers coming too…and a possible b/o senario…
ompanies must ALWAYS be improving FCF’s and revenues and DXM is a FCF cow
The company’s CFO also suggested that the wave of consolidation in the North American directories industry may not yet be over.
In response to a question about any additional consolidation on the horizon, CFO Dee Jones replied, “We have always been an advocate for consolidation….This is a little premature. Right now we are focused on getting this one integrated, but we are always looking at opportunities.”
This statement may fuel speculation that some further combination may eventually be in the offing. In addition to Dex Media, possible players in any future M&A wave might include YP Holdings (majority owned by Cerberus), Yellow Media (Canada), Yellowbook (Hibu’s U.S. operation) and possibly smaller players like Berry.
What is DXM worth with a merger w/Yellowbook?…A Lot!!!
Investors are here with an eye in 2015 or 2016. Traders are interested in today, tomorrow, next week. That’s fine, to each his own and best of luck in either case. But the fact is that neither TRUE investor nor TRUE trader is making their decisions based on SOMEONE ELSES OPINION on a MESSAGE BOARD. And if you do, then you get what you deserve. Simple as that.
I am long and will remain so, until or unless the scenario changes. Moodys assessment yesterday was generally negative, as they harbor doubt as to whether DXM can “reinvent” themselves and stave off cash flow deterioration in the transition from print to digital. I happen to disagree, and so does Kyle Bass and John Paulson, among others. Time will be the arbiter here. This stock will rise or fall on the evidence we get from their financials each quarter. If the digital increase absorbs and even outpaces the print loss, the stock rises and a much higher valuation results. If not, we sag lower and essentially replay the last 2 years. Period. Other blips on the radar or market fluctuations may move us up or down in the short term. But over the long haul, it’s all about revenue mix and growth in the next 2 years.